Current studies show that private equity investments generate better returns in the medium and long term than from buying equities. This further enhances the appeal of this asset class, as more and more companies are breaking into the market and new funds continue to be launched.
PE achieves attractive returns
“The Performance of European Private Equity Benchmark Report 2019”, a study produced by the European association of private capital providers Invest Europe, offers a wealth of up-to-date figures and statistics. The main conclusion that can be drawn from it is that, on average, European leveraged buyout funds have generated an internal rate of return (IRR) of 15.0 per cent annually since the end of 2009. This significantly outperforms the MSCI Europe (index for the performance of the European equity market) at 5.84 per cent. Invest Europe’s detailed study is unfortunately not available to the public, but only to members of the association – however, the essential statements can be taken from the accompanying press release. A current study on private equity as an asset class (“Private Equity als Anlageklasse”) compiled by the German Private Equity and Venture Capital Association (Bundesverband Deutscher Kapitalbeteiligungsgesellschaften – BVK) and the Center for Corporate Transactions and Private Equity (CCTPE) of the HHL Leipzig Graduate School of Management with the support of KfW Capital, provides values similar to those of the European association. In response to queries about how they expect their investments to perform, the investment managers stated a minimum return of nine to ten per cent.
DABG is on trend
The results of the study correspond to the performance of the DBAG funds’ portfolio companies. The net asset value of Deutsche Beteiligungs AG’s private equity investments – a comparable key performance indicator – rose by around 13 per cent annually between the end of 2014 (this KPI has been available since then) and the end of 2019, taking dividends distributed into account. Net asset value roughly corresponds to equity.
According to the BVK’s study, more than two-thirds of investors surveyed plan to increase their private equity investments over the next two years. The remaining 30 per cent want to at least maintain their present levels of investment. Nearly 80 per cent of the investors surveyed have stepped up their PE activities since 2016. These figures show that PE investments continue to remain attractive.
Almost 80 per cent of institutional investors consider investments in the small/midcap buyout sectors in particular as important. This demonstrates that DBAG’s strategy, which is focused on investments in mid-sized enterprises, is on the right track. The BVK study puts the share of PE investments in the overall portfolio of German investors at an average of around seven per cent, which is below the worldwide average of ten per cent for investment capital. German Family Offices have placed around 13 per cent of their investments in PE funds.
Experience and track record as investment criteria
Institutional investors have clear requirements regarding private equity funds: for more than 80 per cent of the investors in the BVK study, experience and management quality count among the decisive criteria. The management’s successful track record is almost equally as important for the choice of fund. Experience and track record are key factors that DBAG also applies when selecting members for its investment team.
European funds have kept pace with the US
The performance of the European companies compares well with buyout funds from the US. According to Invest Europe’s study, European funds with a net return of 15 per cent are more than two percentage points ahead of their US counterparts. Compared to the stock market, the difference is even disproportionately larger: With European buy-out funds, the aforementioned 15 percent was earned annually, with European stocks (measured by the MSCI Europe) only 5.84 percent. This is reflected in a correspondingly higher multiple of invested capital, namely 1.67 (buy-out funds) versus 1.22 (European equities), assuming comparable cash flows. The study also confirms an attractive risk profile, with 85 per cent of the European funds making a profit.